Home sales stay strong despite interest rate rise

SUNDAY OUTLOOK

July 03, 1994|By Patricia Horn

The Commerce Department reported last week that home sales remain quite healthy, climbing more than 4 percent in May, which surprised many analysts and economists given rising interest rates. But can that important sector continue at that rate or has the housing market peaked?

Nancy C. Hubble

President, Greater Baltimore Board of Realtors

I have been in the business 38 years and seen the market through many ups and down. Housing prices peaked at the end of the Reagan years. In 1990 the bottom dropped out of the real estate market. Houses were not selling, prices dropped dramatically. People who bought at the peak were not getting back what they paid. It has been a very slow recovery, but I think a healthy recovery without the wild swings. People who bought at the peak in the 1980s are almost back to par with what they paid.

The interesting thing about interest rate increases is that when interest rates were dropping, buyers held back, thinking that rates would drop further. Interest rates today are still low, still in the single digits. When interest rates began rising, a lot of buyers said maybe we ought to buy now. Many stepped into this spring's market. Now, with interest rates higher, people are simply buying a little less home and getting adjustable rate mortgages.

I don't think the market has peaked. We have an extremely strong market. The total overall increase in settled residential homes sales in the Baltimore region in May was 27 percent over the previous May. The whole Baltimore City and Baltimore County market is excellent. New homes sales have done extremely well.

Stanley F. Duobinis

Director of Forecasting, National Association of Home Builders

The increase in interest rates does not explain everything. There has been a perverse effect, a timing delay. Home mortgage rates really didn't start to move up until we got into late May. What we are seeing in sales figures is many decisions to buy that took place in March or April.

The president of the National Association of Realtors says people are buying now because they are afraid rates will go higher. We don't think that explains very much -- demand curves slope down. That can hold for a limited set of people -- say you are going to buy a house in the next month, that might accelerate your behavior to lock in rates. But higher rates do not draw new people into the market.

We have to keep in mind that one reason interest rates are rising is that the economy is doing very well. We now have well over six months of significant job increases, some wage increases. People feel better about the economy. Interest rates are rising partially because demand for money is strong. Those good reasons offset the rise in interest rates.

The basic economics are much better today than nine months ago, a year ago.

Unfortunately, we are right at the peak of the housing market. For the remainder of this year we expect sales to be effectively flat at 710,000 new single-family home sales. Existing home sales, we already see declining in May, and we see them declining slightly in June, and a continued very slow decline the rest of year. That is because long term rates will stabilize at a slightly higher level.

Michael A. Conte

Economist, University of Baltimore

Maryland has picked up about 5 percent a year in existing home sales for the last three years. That is steady growth. In the past few months that has led to the resumption of significant activity in housing starts.

Another thing to note is the very significant differences among the counties within the metropolitan area. The outlying counties -- Carroll and Harford -- are doing exceptionally well. Baltimore City, while experiencing growth, is not seeing numbers in the same league. Baltimore County and Howard County are in the middle, doing well but not spectacularly.

I think we will see a continuing pickup in existing home sales in sales and prices. We will have a good summer, not as good as if we hadn't had those interest rate spikes from Federal Reserve. As a result, people lost a bit of confidence, people are building a few less units on spec, and the result of all that is a big kicking in of starts but not as much as if no interest rate hikes.

This summer will be better than last year, because there was not a lot of activity in new homes and speculative development then. The housing market looks quite strong. I wish we were able to see an even stronger market, but it is still a good recovery and that will be reflected in the housing market.